The impact of investor protection on financial performance of Islamic banks: An empirical analysis

Abstract

The last decade witnessed dramatic growth of the Islamic banking and finance sector, which had largely been credited to its adoption of the profit and loss sharing principles. However, in practice, the Islamic banks mostly reply on debt-like financing methods such as mark-up and leasing finance instead. Consequently, the investors are exposed to default risks. This study empirically examines the impact of investor protection on financial performance of Islamic banks based on an unbalanced panel data collected from 91 Islamic banks and financial institutions worldwide across 1991-2010. Econometric techniques are adopted to specify the models. Results show that stronger investor protection results in better financial performance in the Islamic banking and financial institutions. The paper concludes with acknowledging the limitations and discussion of future research directions